During recessions, banks typically choose to hold more excess reserves relative to their deposits. Which of the following best describes the effects of the increase in reserves?
A)The money multiplier increases, and the money supply increases.
B)The money multiplier decreases, and the money supply decreases.
C)The money multiplier does not change, but the money supply increases.
D)The money multiplier does not change, but the money supply decreases.

Question

Quizplus · Accepted Answer

Banks holding more excess reserves means they will lend out less money, decreasing the money multiplier. This will lead to a decrease in the money supply.

During Recessions, Banks Typically Choose to Hold More Excess Reserves